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Daily Newsletter, Monday, 09/15/2003

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The Option Investor Newsletter                   Monday 09-15-2003
Copyright 2003, All rights reserved.                        1 of 2
Redistribution in any form strictly prohibited.


In Section One:

Wrap: Isabel Swirls Closer
Futures Wrap: Dollar and Treasuries Advance, Equities and Gold
              Slide
Index Trader Wrap: Thump, thump.... thump, thump...
Traders Corner: Testing Outside Days


Posted online for subscribers at http://www.OptionInvestor.com
*******************************************************************
MARKET WRAP  (view in courier font for table alignment)
*******************************************************************
      09-15-2003           High     Low     Volume   Adv/Dcl
DJIA     9448.81 - 22.74  9490.91  9436.60 1.91 bln 1414/1443
NASDAQ   1845.70 -  9.33  1861.81  1843.79 1.81 bln 1828/1256
S&P 100   509.96 -  2.34   512.81   509.49   Totals 3242/2699
S&P 500  1014.81 -  3.82  1019.79  1013.59
W5000    9842.92 - 34.39  9891.25  9835.68
RUS 2000  507.64 -  1.42   511.95   507.47
DJ TRANS 2735.60 -  2.62  2742.66  2729.23
VIX        20.54 +  0.29    21.44    20.25
VXN        32.93 +  0.25    34.01    32.90
52wk Highs  286
52wk Lows    23
PUT/CALL   0.66
*******************************************************************

Isabel Swirls Closer
by James Brown

Stocks were weaker on Monday as Wall Street tried to anticipate
Hurricane Isabel's arrival while dealing with fears that tech
stocks may be overvalued.  Combine the usual concern/excitement
in front of the FOMC's meeting on interest rates tomorrow with
Friday's triple-witching option expiration and the moves today
were rather shallow.  The lion's share of losses were in the tech
sector despite a few key upgrades and positive comments for the
semiconductor industry again.

Overseas exchanges were mostly positive.  The English FTSE 100
and the German DAX both closed in the green.  The Hong Kong Hang
Seng exchange added 109 points to close at 10,992.  The Japanese
NIKKEI index jumped 166 points to 10,712.  U.S. index losses were
mild with the Dow Jones Industrials down 22.74 points to 9448;
the NASAQ Composite lost just over 9 points to 1845 and the S&P
500 dropped just under 4 points to 1014.  Market internals for
U.S. exchanges were negative. Declining stocks beat advancers by
15 to 12 on the NYSE and 16 to 14 on the NASDAQ.  Down volume
also rushed past up volume by 859M to 500M on the NYSE and 863M
to 562M on the NASDAQ.

Chart of the DJIA:



Chart of the NASDAQ:



Monday's Economic Reports

It was a busy day for economic reports which turned out generally
positive but investors chose to ignore them for the most part.
The Federal Reserve released the August Industrial Production
numbers which showed a +0.1 percent increase in August but it was
below consensus estimates for +0.3 percent.  This was the first
back-to-back gain since February for the industrial production
numbers.  The Fed's production report showed Manufacturing output
slipped 0.1 percent in August after three months of gains.
Utilities production rose 1.9 percent and mining output gained
0.2 percent.  The overall capacity utilization numbers was
virtually unchanged at 74.6 percent.  Technology investors will
find it interesting to note that the Fed's report showed high-
tech production rising 2.3 percent.  Inside the technology
group's improvement was a 2.6 percent growth in semiconductors, a
2 percent growth for computers and a 1.9 percent jump in
communication equipment.  This was the biggest improvement for
technology output since September 2000.

The second biggest report out today was produced by the Buffalo
branch of the Federal Reserve Bank of New York.  This was the New
York Factory index.  Values greater than zero for this localized
index represent improving business conditions and economists were
looking for a rise to 14.  The September number was a blow out as
it jumped to 18.4 from 9.98 in August.  Today's report marked the
fifth straight monthly gain for the New York area.

Hurricane Isabel

One of the big stories of the day and potentially the biggest
story of the week is Hurricane Isabel, which is quickly
approaching the east coast.  Isabel's winds have slowed a bit but
they are still pushing 140 miles an hour.  That's just below what
it needs to be a Category 5 storm, the highest classification for
the most devastating storms.  Isabel is expected to hit land
between Wednesday morning and Thursday morning.  Wall Street
analysts were quickly trying to compute which insurers had the
most exposure to this natural disaster.

Most were pointing fingers at AllState (ALL) as the insurance
company with the most to lose should Isabel really hit the coast
hard.  Insurance stocks as a group lost ground ahead of the storm
but most analyst believe that if the damages are high enough it
will give the industry license to raise their premiums, which
will translate into higher stock prices.  Goldman Sachs estimated
that if Isabel's damage rang in less than $5 billion then
premiums would not likely rise.  Should the damage fall between
$5 and $10 billion then insurance companies would probably take
advantage of the storm to raise premiums.  Goldman said that if
Isabel's fury creates more than $10 billion in damages then
almost every insurer with exposure to the area would probably
miss their Q3 estimates.  As a comparison hurricane Hugo, a
Category 4 storm, hit S. Carolina in 1989 and caused $7 billion
in damages.  It was only three years later, in 1992, that
Category 5 storm Andrew became the most expensive natural
disaster in U.S. history causing $25 billion in damages.

Believe it or not but Isabel actually helped lift the DJIA from
falling even father as component Home Depot (HD) rose +3.76
percent.  Rival homebuilding supplier Lowes Corp (LOW) also
jumped +2.4% as investors bid up the two retailers as the east
coast begins boarding up their windows and stocking up on
batteries and flashlights.

Boston Scientific Soars

In a much anticipated industry conference in Washington, Boston
Scientific reported on their latest findings regarding the Taxus
drug-eluding stent with more than 1300 patients in the study.
The results were extremely positive.  Not only did BSX's Taxus
stent significantly outperform the bare-metal stent's performance
numbers but they beat rival Johnson-and-Johnson's (JNJ) Cypher
stent.  Shares of BSX and partner Angio Pharmaceuticals (ANPI)
have risen sharply in the last several months on investors'
expectation that the FDA would approve the Taxus stent for the
U.S. markets.  Currently, JNJ is the only company selling a drug
eluding stent in the U.S. and BSX is going to be stiff
competition.  The BSX stent is already outselling the JNJ stents
in overseas markets and BSX just recently got approval to market
the Taxus stent in Canada.

Shares of BSX were halted for most of the session as the results
of the study were not released to the public until 2:00 PM ET.
Once BSX began trading shares vaulted $4.62 or +7.5% to $66.05
and drug partner ANPI jumped $5.85 or more than 13 percent to a
new high $49.72.  Shares of JNJ lost just 79 cents or 1.5% to
$50.84.  Today's news was a big event for the industry but BSX's
path down the stent-paved yellow brick road is not without its
struggles.  Both BSX and JNJ are awaiting a Federal court's
decision on JNJ's request to prevent BSX from marketing and
developing its drug-eluding stent in the U.S.  Wall Street
doesn't expect JNJ to win the decision but both companies will be
in patent-infringement litigation in a fight for the stent
market.  JNJ is already preparing for the competition by lowering
the prices on its Cypher stents last week.  The legal issues are
not impeding BSX's enthusiasm and the company raised their Q3
guidance from $810-840 in sales and earnings of 24-28 cents to
$855-865 million in sales and 28-30 cents per share.

Analyst Comments

Investors have grown accustomed to a parade of analyst comments
on Monday mornings and today was no different.  Some of the
comments making headlines today were from Merrill Lynch.  Merrill
(MER) upgraded the semiconductor sector's growth figures for 2004
and upgraded shares of equipment makers Applied Materials (AMAT)
and Kulicke and Soffa (KLIC) from "neutral" to "buy".  Morgan
Stanley (MWD) also chimed in with positive comments on the chip
sector citing improved industry fundamentals and rising revenue
expectations of 4-to-7 percent growth in Q3 and Q4.  While this
is obviously positive news for the chip sector, the SOX slipped
1.88 percent on the session.  One has to wonder if there are any
analysts out there who have not upgraded the chip sector on
improving fundamentals?

Goldman Sachs was also making headlines with its latest IT
spending survey.  The most recent survey was taken mid to late
August and the numbers were not encouraging.  Information
technology spending for 2003 is likely to come in at zero percent
growth or worse despite the improvement in the U.S. economy.
Goldman continues to see the recovery being postponed and expects
growth to come in just under 4 percent for 2004.

Noteworthy calls were also made by UBS who upgraded IBM from
"neutral" to "buy".  UBS believes that IBM's chip business and
server division will improve.  Gosh, after the previous upgrades
for IBM the last couple of months is there any business that
analysts don't think will improve for IBM?  Talk about high
expectations.  Slashing some expectations was Smith Barney who
cut Apple Computer (AAPL) and Hewlett Packard (HPQ) with
valuation downgrades.  Smith was kinder to the homebuilders with
an upgrade for Toll Brothers (TOL) and KB Home (KBH) to "buy"
from "in-line".  J.P. Morgan happens to agree on TOL and upgraded
the stock from "neutral" to "overweight".  Shares of TOL rose
more than 3.6 percent and the DJUSHB homebuilders index was one
of the few indices that closed in the green today.

Tomorrow

Tuesday's big event will be the FOMC meeting on interest rates.
At the last meeting on August 12th the FOMC chose to keep
interest rates at a 45-year low of 1 percent.  No one is
expecting them to make any changes but the focus will be on what
they have to say about the economic recovery.  Expect their
statement to reflect on the incredible rate of productivity and
the concerns over slow growth in the labor markets.  Economists
will also be waiting for the CPI and Core CPI numbers out
tomorrow.  Meanwhile Wednesday will have Housing starts, building
permits and the semiconductor book-to-bill ratio on Wednesday
night.  Don't expect a lot of big moves in the market ahead of
the Fed's decision on interest rates and watch those stop losses!



************
FUTURES WRAP
************

Dollar and Treasuries Advance, Equities and Gold Slide
Jonathan Levinson

Today brought a low volume downward drift for equities, with gold
correcting.  The US Dollar gained slightly and treasuries
advanced.

Daily Pivots (generated with a pivot algorithm and unverified):





15 minute chart of the US Dollar Index



The US Dollar Index managed to hold a 20 bp gain from the bounce
off its Friday lows, hovering along the 96 support level.  A
number of attempts above 96.20 were rejected.  Notwithstanding
the apparent bearishness, gold got sold aggressively at the open
and was unable to gain any ground, while the CRB dropped 1.74 to
close at 240.45.  Sugar, FCOJ and coffee futures led the index to
the downside.


Daily chart of December gold



Gold got clocked today, spiking below the lower wedge trendline
but managing to close on a doji reversal just below it.  Whether
this is the start of a correction to the bear wedge target of 345
or something less remains to be seen, but the daily chart
oscillators gave sell signals today from overbought.  Both
oscillators are within uptrends, but the wedge formation and
today's trendline break signal extreme caution for bears.  The
HUI and XAU were weak today, managing to trade in positive
territory for a few hours but not able to hold it.  HUI dropped
2.51 to 196.02, XAU -.39 to 91.95, and December gold –1.60 to
375.30.


Daily chart of the ten year note yield




Ten year treasuries were weak this morning, but dramatically
reversed their losses to close just below their highs of the day,
with the ten year note yield (TNX) dropping 2.4 bps to close at
4.245%.  Support for the yield below 4.2% remains nearly
unchallenged, despite the clear oscillator downtrend on the daily
chart.  A break above 4.35% could kick off a bull wedge breakout,
but for the moment the trend remains down for the yield (up for
treasuries).  If a bounce in the TNX is due, it will come from
just below 4.2%.  Note that there is an FOMC announcement due at
2:15 EST tomorrow.

Daily NQ candles



The NQ dropped 11.50 points or .84% today, setting the pace and
leading the other equity indices lower.  It appears that dollar
strength is bearish for equities, as today's trade saw the dollar
advance, equities and gold slip, and treasuries advance.
Treasuries were initially weaker, but, perhaps frontrunning
tomorrow's FOMC meetings, they reversed in mid-session.

The NQ is either below the breakdown point of a bear wedge or
still above support within a secondary bear wedge on the daily
candles.  The oscillators are on sell signals here, and while the
overall chart bias appears to be up, there is increasing evidence
that we may be witnessing the building of a top.  A closing print
below the lower ascending trendline would bring in a bear wedge
downside target below 1220 and confirm the downward bias.

30 minute 20 day chart of the NQ



The NQ led the latter stages of this year's rally, in what may
have been a "performance chasing" blowoff phase as managers
chased the highest beta, most highly shorted stocks to try to
"catch" the spring rally if they missed it.  Just as the NQ led
this phase to the upside, it appears to be leading now to the
down.  As we'll see below, the stochastic upphase on the 30
minute chart is violated on the NQ but not yet on the ES or YM.

Daily ES candles



The ES outperformed the NQ today but is still either below bear
wedge support or above it, depending on the interpretation of the
daily candle chart.  Either way, oscillator sell signals are
printed, and the 1002-1008 support level is looking increasingly
fragile.  The bear wedge downside target on a full decline is
957,  with earlier support in the 985 area.  Today's candle
formation is now bullish, and a closing move below 1008 should
give the oscillator sell signals a more aggressive orientation.


20 day 30 minute chart of the ES



Unlike the NQ, the ES still has a stochastic and Macd uptrend
that remains intact, with a bullish divergence from last
Wednesday.  If the NQ is any indication, this should prove to be
a headfake, but it must be respected for the time being.  Note
that the bvll wedge/flag support in now down to 1000, which lines
up with Fibonacci support.  Bears should not ignore this level,
with 1008 first and weaker support.

150 tick chart of the ES



The intraday ES shows what was an unpleasant day for directional
traders, with a choppy, rangebound market offering a number of
false starts and few directional opportunities.  The close was
bearish but still uncertain, as the earlier session low remained
intact and the short cycle ADX trendless despite the closing
decline.  Tomorrow morning is a toss-up for either a continuation
of the range or a continuation of the decline.

Daily YM candles



Exactly the same setup on the YM as for the ES.  9400 support was
not touched or broken, while 9300 remains lower wedge/flag
support.

20 day 30 minute chart of the YM



As this is options expiration week, we can unfortunately expect
more of the same, with rapid directional moves interspersed with
long, meandering ranges as option writers battle it out for a
favorable end-of-week print.  Gold should be watched in this
corrective phase, while treasuries bucked the trend today.  I
expect that tomorrow will bring more low volume uncertainty ahead
of the FOMC announcement in the afternoon.



********************
INDEX TRADER SUMMARY
********************

Thump, thump.... thump, thump...

There was little pulse to begin the week of an option/futures
quarterly expiration as the major indices flat lined for the bulk
of the session to finish fractionally lower.

Coated-stent maker Boston Scientific (NYSE:BSX) $66.01 +7.5%
received the bulk of today's headlines as the results of a long-
awaited trial for its Taxus device, which is designed to open
clogged arteries to the heart.  The company has said that Taxus
sales could read $2 billion in 2004.  Trial results appeared to
be favorable with a modes 7.9% of trial participants seeing
reclosure, which compared favorably with 26.6% of patients who
got older "bare" stents.

Boston Scientific's partner, Angiotech Pharmaceuticals
(NASDAQ:ANPI) $49.70 +13.3% were also halted during the bulk of
today's session, but surged $5.85 before their NASDAQ close.  The
Vancouver-based company had licensed rights to certain drug-
delivery technology to BSX for use in the drug-coated stent.

A court battle is developing between Boston Scientific (BSX) and
rival Johnson & Johnson (NYSE:JNJ) $50.84 -1.53%, as JNJ has
filed a patent infringement lawsuit against BSX in Federal court
seeking an injunction to block BSX from marketing the stent.  SG
Cowen analyst Matt Dodds said in a note to clients last week that
he doubted JNJ would win an injunction before BSX could launch
its Taxus stent.  Still, Mr. Dodds cut his rating on BSX to
"market perform" from "strong buy," saying FDA approval of Taxus
will likely be delayed until April 1.

Economic data released this morning showed the NY Empire State
Index jumping to a reading of 18.35 in September, which was well
ahead of economists' forecast of 15.0 and August's reading of
10.0, but wasn't enough to jolt the indices higher as a modest
0.1% more national August industrial production gain and August
capacity utilization, which still showed approximately 25.4% of
the nations capacity sitting idle, at 74.6%, showed more anemic
gains.

The capacity utilization data was still rather cool and showed
little improvement from June's 20-year low reading of 74.1% and
gives little economic indications to the Fed that any policy
tightening is needed, as there's plenty of idle capacity still
available to meet any resurgence in demand.

Economic data scheduled for release tomorrow comes in the form of
August consumer prices.  August CPI is forecasted to show a 0.3%
gain, while the core rate, which excludes the more volatile food
and energy components, is expected to rise 0.2%.  Then at 02:15
PM EST, the FOMC's decision on interest rates should be
announced.

A calm in the major indices before Hurrican Isabel (now rated
category 4) is to reach landfall later this week near Cape
Hateras North Carolina (current forecast) did see the S&P
Insurance Index (IUX.X) 268.56 -1.1% fall 3 points, while
building product retailer Home Depot (NYSE:HD) $32.78 +3.76%
helped boost the S&P Retail Index (RLX.X) 356.70 +1.52% as
coastal residents were said to be readying to board up windows
and stockpile some last-minute construction materials and
flashlight batteries.

Volume levels at both the NYSE and NASDAQ were above the 1
billion mark, but off recent sessions rate.  The NYSE turned just
over 1.13 billion share with decliners outnumbering advancers by
a 9 to 7 ratio, while 131 stocks traded new 52-week highs versus
8 stocks reaching a new 52-week low.  NASDAQ churned just over
1.44 billion share with decliners outnumbering advancers by an 8
to 7 margin, while 242 stocks hit new 52-week highs compared to
just 8 stocks trading a new 52-week low.

Gillette (NYSE:G) $32.42 -0.82%, which makes Duracell batteries
failed to hold an early morning charge of $32.75 and slipped
$0.27 per share, while Energizer Holdings (NYSE:ENR) $37.65
+0.72% drummed up a 27 cents per share gain in today's trade.

Treasuries opened today's session with selling after the
stronger-than-forecasted NY Empire State Index, but saw a slow
reversal to buying with YIELDS finishing lower after the more
national August industrial production/capacity utilization data
was released.  The shorter-dated 5-year YIELD ($FVX.X) fell 5
basis points to 3.106%, the benchmark 10-year YIELD ($TNX.X) fell
2.4 basis points to 4.245% and the longest-dated 30-year YIELD
($TYX.X) edged down 0.4 basis points to 5.171%.

Here's a quick look at the pivot analysis matrix, where the major
indices found intra-day resistance on several occasions early at
their WEEKLY pivots.  While not entirely certain (can't prove
this quantitatively) I do think there was quite a bit of covered
call writing taking place in August in some out the money index
calls in the then range-bound SPX/OEX (selling OEX 505) and some
protective put buying to hedge a decline below OEX 485.  I
thought this as we witnessed an up tick in the Market Volatility
Index (VIX.X) 20.25 (unch) in early August when the VIX.X rose
for four-consecutive sessions from 21.22 to 25.66.

I mention this observation ahead of this week's triple witching
expiration for quarterly expiration, where the 405 OEX level is
dead smack between its MONTHLY Pivot and MONTLY R1, while WEEKLY
S1 is 506.75.  I'm not certain that institutions were selling
some out the money covered calls on positions, but if so, we
might at least be aware to some potential long stock selling of
partial positions into expiration back near OEX 405, which would
still be comfortably above more firm support of 500 and WEEKLY
S2.

Pivot Analysis Matrix -



I've dashed red some correlative levels of resistance, where
those levels were traded today, but looked to have served some
resistance when the indices were trading in positive territory.

This week, the OEX shows some correlative 512 resistance at
MONTHLY R1 and WEEKLY Pivot, where its WEEKLY S1 and WEEKLY R1
would mark last week's range.  When we look at the bar charts
with new WEEKLY retracement, there is really little change from
last week and traders seemed to want to take a wait and see
approach to things and perhaps wanting to listed to some of
tomorrow afternoon's brief statements from the Fed.

My best guess is that the FOMC's comments will echo their last
meeting.  Improving signs of economic growth, with no
inflationary pressures showing up as the jobs market along with
past increases in productivity give ample room for expansion
before inflation concerns arise.

S&P 100 Index Chart - Daily Interval



Economic data (aside from jobs) continues to show signs of
recovery, but August industrial production is one of those glass
half full and half empty reports.  The negative view is that
manufacturers are still hesitant to bring on production as if
they don't see more robust demand.  At the same time, we've seen
inventories fall, sales increase, and this anemic August
production should see September production accelerate.

One trader asked me if I had written any educational comments on
WEEKLY and MONTHLY pivot levels, and how they should be traded.

I haven't, but will say that I believe, based on observation,
that a LONGER-TERM trend or level, like a MONTHLY level (S2, S1,
Pivot, R1, R2) may hold greater significance than a WEEKLY level,
while a WEEKLY level, would be expected to hold greater
significance than a DAILY level.  Remember, the various levels
are derived from MONTHLY ranges of trade, WEEKLY ranges of trade
and DAILY levels of trade.

In the above OEX chart, I make note that the MONTHLY R1 (comes
from August's high,low,close) Pivot of 512.53 along with the
WEEKLY Pivot of 512.53 have correlative resistance in play right
now.  I didn't mention that the OEX's MONTHLY Pivot of 498.31 is
quite close to this WEEK's S2.

I do note here that the OEX 500 puts (OEBUT) were actively traded
today at 2,866, while the OEX 520 calls (OEBID) were saw 3,893
trade.  Both contracts currently show largest open interest for
month of September.  My thinking is call and put selling with few
days left to expiration.

Today's trade saw no net change in the narrower S&P 100 Bullish %
($BPOEX).  Status remains "bull confirmed" at 88% bullish.

S&P 500 Index Chart - Daily Interval



Since I addressed a trader's question regarding overlapping
WEEKLY and MONTHLY levels, I would also note that in the SPX, I
worked through a different trader's question on August 10th in an
Ask the Analyst column regarding his observation of QUARTERLY
levels.  Just out of curiosity sake, I went back an looked at the
last SPX chart in that exercise and will note that the current
QUARTERLY R1 is 1,044, which would still be very much in play.
In that exercise we also continued to trade the prior QUARTER's
levels, and I see where the prior QUARTER's R2 (June expiration)
was 1,004 and could be BIG support into Friday's expiration.

Today's trade saw no net change in the broader S&P 500 Bullish %
($BPSPX).  Still "bull confirmed" status at 81.2%.

NASDAQ-100 Tracking Stock (QQQ) Chart - Daily Intervals



Friday's intra-day reversal from the $33.05 level didn't quite
get the follow through to $33.95 I thought it might late Friday
afternoon in the Market Monitor.  Volume today was about 1/2 of
the last three-day's average, but I think bears will be pressed
on a move above today's highs with an achievable near-term target
of $34.54.

A bull isn't necessarily "crazy in love" with the QQQ having made
a more than 10% move from the early August lows at this point,
with MACD just crossing below signal at a past relative high
reading for this oscillator and is counting on short-covering (in
my opinion) to get the pop back near last weeks highs as
Stochastics, which have helped fuel bounces, begins to turn
higher.

In a trending upward or downward market, I tend to put more
weight in the MACD that Stochastics, which tend to give better
indications of a rebound in a sideways to range-bound trade.  The
QQQ and the Dow Industrials have been in more of an upward trend
than the SPX and OEX.

Today's trade saw not net change in the narrower NASDAQ-100 Index
Bullish % ($BPNDX).  Still "bear correction" status at 78%.

Dow Industrials (INDU) Chart - Daily Interval



The Dow Industrials (INDU) lost a bit of its upward momentum last
week when MACD edged below Signal and today's break of aggressive
bullish trend has the rising shorter-term 21-day SMA of 9,437 the
key technical momentum driver for bulls, otherwise Dow a bit
vulnerable near-term to WEEKLY S1 of 9,368, which does a good job
of marking the summer highs, when broken as resistance should
serve support.

Today's trade saw no net change in the very narrow Dow
Industrials Bullish % (BPINDU).  Still "bull confirmed" at
83.33%, where it would take a reversal reading of 80% for "bull
correction" status and 78% to achieve "bear confirmed."

Jeff Bailey


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**************
TRADERS CORNER
**************

Testing Outside Days

Have you ever observed a profitable price pattern you would like
to test to see how well it really worked? How it would hold up in
real life? How it has traded in the past?

Say you see an Outside day bar, one that entirely encompasses the
previous days bar and you notice that these outside days can
sometimes mark important market reversals. Could this observation
be made into a trading strategy that would hold up under
scrutiny, under rigorous testing?

If you have asked these questions then you have just taken the
first step in system development for all trading systems start
with a trading idea or trading concept that someone wanted to
test, then applied the rules of system development to create a
trading strategy.

I would like to use the rules of system development I first
introduced in my article
http://www.OptionInvestor.com/futurescorner/fc_062903_01.asp to
"test" the concept of the "Outside Day Bar."

A successful trading system has five basic components:

1. Market Action - this is where you identify which market to
trade. You probably want a market that is liquid for quick fills
and low slippage. I chose the S&P Spiders (SPY) for these reasons
and, since I am looking for market reversals, I wanted a trading
vehicle that represented the whole market.

2. TimeFrame to Trade - this is the trading interval you will
use. Since I am looking for a swing trading system that will
carry trades over night I will use the daily bars.

3. Entering a position - This is where you set out the rules for
entering the market you identified in one. Typically you would
use a setup, filter and a trigger, which are discussed later in
the article.

4. Exiting a Position - this component is a single condition or a
group of conditions you will apply to close out a position. These
conditions can be as varied as a change in the market, reaching a
established profit target, an "uncle" level where your money
management plan says you can no longer stick around or as simple
as elapsed time. I will be using the elapsed time element in this
study and testing for various combinations to determine which
ones will give me the greatest profit potential.

5. Trade management is the component where money management comes
into play. It is an evaluation of the stop loss size and
determining how many shares/contracts to risk. This element will
not be discussed in the article for I will be assuming you have
already addressed it in your own money management plan.

Since, we have addressed the first two basic components of system
testing, market action and timeframe, let's discuss #3, setup,
filter and trigger rules.

We start with the setup bar and a definition of the outside bar -
high of today is higher than yesterday and low of today is lower
than yesterday. Here is the Tradestation code for an Outside Day
bar high > high[1] and low < low[1].

I have "painted" each outside bar in green to make visual
observations easier.




My first visual observation made from looking at outside days was
they tended to close in the direction of the short-term trend
represented by a 10 EMA. However, some of the more conspicuous
outside bars were at significant swing lows or swing highs where
the bar closed in the opposite direction to the trend. For
example, the outside bar that marked the July 24th and October
10th low and the December 2nd high. Take note the two bullish
reversal bars closed in the upper 1/2 of the bar's range and the
outside bar, which marked the December 2nd high, closed in the
lower 1/2 of the bar's range.

My second observation was the bullish reversal bars close was
greater than the open and the close was less than the open on the
bearish reversal bar.

Third was the bullish reversal bars close was greater than the
close of two days ago and the bearish reversal bars close was
less than the close of two days ago. I used two days ago instead
of yesterday to give me a little more assurance of the changing
trend.

To make sure the bar occurred during an uptrend or downtrend I
have added three more filters. To define the trend I have used
one of my favorite trend indicators the ADX. In my intraday
trading I use an ADX of 30 to define the strength of the trend
but with the daily bars I have lowered the level to 20. I define
the trend direction with the DMI. I also added the low of the day
must be less than the 10 EMA to help define a downtrend and the
high of the day must be higher than the 10 EMA to help define an
uptrend.

These rules are the filters discussed in #3 of the five basic
components of successful system testing.

We will define the bullish reversal bar as follows:

1. Close in upper 1/2 of the daily range
2. Close greater than the open
3. Close greater than the close of two days ago
4. Occurs in a downtrend identified by an ADX(10) greater than 20
and DMI- greater than DMI+.
5. Low of the day must be less than the 10 EMA.

We will define the bearish reversal bar as follows:

1. Close in lower 1/2 of the daily range
2. Close less than the open
3. Close less than the close of two days ago.
4. Occurs in an uptrend identified by an ADX(10) greater than 20
and DMI+ greater than DMI-.
5. High of the day must be higher than the 10 EMA.

Here is an image of the SPY using the above code to "paint" the
bullish outside bars (green) and the bearish outside bars (red).




At first glance it looks enticing but we have more entries than
we bargained for, therefore I replaced the ADX and DMI filter
with a 10 day EMA filter. The trend filter I will now test is the
10 EMA of today is greater than or less than the 10 EMA of
yesterday.





This is looking better but remains to be seen if my observation
is just coincidence or if the Outside Day bars can really mark
tops and bottoms and if we can create a trading system from these
observations. At least I have the basis for the system already
coded in the paint bars.

The next issue we need to address before we run the strategy
performance report is the trigger, when to enter. Let's make it
simple and enter at the open of the next bar - the next day after
a "paint bar" or a bullish or bearish reversal outside bar.

But entry is only part of a complete trading system; we must also
determine where to take losses or profits. The next step is to
run tests on different combinations of a time elapsed based exit
strategy although we have the ground work done and a very good
base from which we can start some serious testing. But for now I
think I will put my poor arm down because it is almost seizing up
from too much use.

I will pick this up after my testing and show you how well this
strategy pans out.

Remember plan your trade and trade your plan.

Jane Fox



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The Option Investor Newsletter                   Monday 09-15-2003
Copyright 2003, All rights reserved.                        2 of 2
Redistribution in any form strictly prohibited.


In Section Two:

Stop Loss Updates: LUV
Dropped Calls: None
Dropped Puts: EBAY
Play of the Day: Call - LUV
Watch List: DLTR, QCOM, BBBY, TSCO, AMZN

Updated on the site tonight:
Market Posture: Coming soon



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*****************
STOP-LOSS UPDATES
*****************

LUV - call
Adjust from $17.25 up to $17.50


*************
DROPPED CALLS
*************

None


************
DROPPED PUTS
************

eBay, Inc. - EBAY - close: 53.88 change: +1.26 stop: 54.25

With last week's market decline finding no follow through, the
bulls came back into their favorites last week, and EBAY was
clearly among them.  Since rebounding from just above the $50
level, the stock has steadily advanced up near the $54 level and
today closed just below both the 20-dma and the 50-dma.  We
initiated coverage with a trigger below $50 and fortunately that
was never hit, so the play was never activated.  With EBAY looking
like it wants to break out over near-term resistance, and a
breakdown under $50 looking less and less likely, we're dropping
the play tonight as a possibility that never panned out.  We may
revisit the stock as a bearish candidate if the bears can once
again pressure that $50 support level.

Picked on September 9th at   $50.87
Change since picked:          +3.01
Earnings Date              10/23/03 (unconfirmed)
Average Daily Volume =     13.1 mln





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**********************
PLAY OF THE DAY - CALL
**********************


Southwest Airlines - LUV - cls: 18.78 chng: +0.20 stop:17.50*new*

Company Description:
Southwest Airlines is a domestic airline in the United States
that provides predominantly short-haul, high-frequency, point-to-
point, low-fare service.  As of the end of 2002, LUV operated 375
Boeing 737 aircraft and provided service to 59 airports in 58
cities in 30 states throughout the country.  The company focuses
principally on point-to-point, rather than hub-and-spoke, service
in markets with frequent, conveniently timed flights and low
fares.

Why we like it:
After breaking out over $18.25 resistance on Thursday, shares of
LUV continued their ascent into the weekend, tacking on another
1.2% on very strong volume.  The overall Airline index (XAL.X)
joined in the party, adding 1.5% to reach a new 52-week closing
high.  The XAL will have its work cut out for it as it nears
strong resistance near $70, and LUV bulls will have to work hard
to press the stock up towards the top of the current resistance
band at $20.  But with a fresh PnF Buy signal under its belt and
a bullish price target of $23.50, we think it is definitely a
reasonable goal.  With three days of building support near $18,
an intraday pullback near that level looks good for fresh
entries.  Aggressive traders can certainly buy further strength
above $18.60, but need to be aware of the risk of a pullback due
to the fact price is continuing to press against the upper
Bollinger band.  If buying into strength, make sure to confirm
further strength in the XAL index as well.  We're inching our
stop up to $17.25 this weekend, keeping it below what should be
strong support offered by the 20-dma ($17.42) and last
Wednesday's intraday low ($17.40).

Why This is our Play of the Day
Still flying high, the Airline sector (XAL.X) was one of the few
to actually close in the green on Monday in what was a
lackluster, rangebound session.  With a gain of only 0.06% and
ending with a gravestone doji candle pattern, it is hard to call
the action in the XAL bullish, but our LUV play fared much
better.  As one of the stronger stocks in the Airline index, LUV
soared as high as $18.95 early in the day before backing off to
post only a 1% gain.  But the bullish trend is very much intact,
as the stock continues to distance itself from last week's
breakout over the $18.25 level.  Traders already in the play
should now be looking at tightening stops closer to the point of
entry.  We are continuing to pull our stop up just behind the 20-
dma ($17.51), so our stop is now set at $17.50.  If looking for a
new entry, the best bet is for a pullback and subsequent rebound
from the $18.00-18.25 area on a successful test of old resistance
as new support.

Suggested Options:
Shorter Term: The October 17 Call will offer short-term traders
the best return on an immediate move, as it is currently in the
money.  Note that the September contract expires on Friday.

Longer Term: Aggressive traders looking to capitalize on an
extended rally will want to look to the December 20 Call.  This
option is currently out of the money, but should provide
sufficient time for the stock to move higher without time decay
becoming a dominant factor over the short run.  More conservative
long-term traders will want to use the December 17 Call.

BUY CALL SEP-17 LUV-IW OI=6287 at $1.40 SL=0.75
BUY CALL OCT-17 UVM-JW OI=1597 at $1.60 SL=0.75
BUY CALL DEC-17 LUV-LW OI=3135 at $2.00 SL=1.00
BUY CALL DEC-20 LUV-LD OI=1559 at $0.70 SL=0.35

Annotated Chart of LUV:



Picked on September 11th at  $18.36
Change since picked:          +0.42
Earnings Date              10/20/03 (unconfirmed)
Average Daily Volume =     2.45 mln
Chart =



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**********
Watch List
**********

Dollar Tree Stores - DLTR - close: 34.90  change: -1.14

WHAT TO WATCH: Shares of DLTR have fallen out of their rising
channel and last week they dropped below the simple 50-dma.  The
moving average has remained short-term resistance and the failed
rally Friday-Monday has led to a close below the $35 mark on
decent volume.  Bearish traders might see this as a signal to go
short or look for more confirmation below today's low.  We'd
expect some support near $32.50 but our target would be $30.00.

Chart=


---

QUALCOMM - QCOM - close: 43.45 change: +0.63

WHAT TO WATCH: Shares of QCOM are powering ahead to new 52-week
highs amid technology weakness on Monday.  The stock was upgraded
by Merrill Lynch on Friday and its Point-and-Figure chart is
displaying a massive quadruple-top bullish breakout.  Bulls
should definitely keep an eye on QCOM and take notice of the
strong volume on some of the recent rallies.  We would expect
some resistance near $45 but longer-term traders might target
$50.

Chart=


---

Bed Bath & Beyond - BBBY - close: 41.00 change: +0.38

WHAT TO WATCH: BBBY is another retail stock that closed in the
green on Monday.  Shares are bouncing from the $40 level, which
look like support on both the daily and weekly charts.  Its
simple 50-dma is also acting as support near the $40 level.
Short-term traders might wager on a move to the $44 area.  The
point-and-figure chart appears to be building a triangular
consolidation pattern, which might hint at more range bound
trading before any breakout.

Chart=


---


Tractor Supply Co. - TSCO - close: 35.85 change: +0.41

WHAT TO WATCH:  There is no post-split depression in shares of
TSCO.  The stock recently split 2-for-1 in late August and the
stock has continued to rally higher.  Looking at the weekly chart
is likely to give you vertigo but the daily shows a nice bounce
from the $34 region.  Bullish traders might attempt a momentum
trade on a move above $36.35.  A drop below the 21-dma might
offer a bearish signal if you're interested in trading the
downside.

Chart=


---


Amazon.com - AMZN - close: 45.51 change: -0.17

WHAT TO WATCH: Shares of Internet auction giant AMZN continue to
trade sideways above short-term support at $45.00.  The stock
appears to have lost its momentum and is consolidating its gains
in a sideways trading range.  Aggressive bears could use a
trigger below $44.70 and target a move to $40 but watch out for
potential support at $42.50 and its 50-dma.  Aggressive bulls
could wait for a bounce from the same levels (42.50) or look for
a move above $48.00.

Chart=




**************
MARKET POSTURE
**************

Coming soon


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